retail marketing and merchandising

Retail ManagementRetail Management

Presentation by Divya JoharTo

M.B.A (Finance and H.R. Departments)Indian Institute of Planning and Management

(IIPM, Hyderabad)10th August 2010

Retail Marketing and MerchandisingRetail Marketing and Merchandising

1. Merchandise planning, buying and handling.

2. Pricing, promotional and communication MIX.

3. Customer Service; Gaps model, CRM

Merchandise ManagementMerchandise Management

• Focuses on the planning and controlling of the retailer’s inventories.

• Defined as:

• The planning and implementation of the acquisition, handling and monitoring of merchandise categories for an identified retail organisation.

• Need for:

• acquisition from wholesalers or manufacturers

• and for merchandise to be handled in an appropriate way to ensure it is sold in perfect condition.

• Buying process must be grouped into an individual category.

• The buyer must understand different market segments such as those defined by age (children, infants, youth etc..) or by gender.

• A category is an assortment of items that the customer would perceive as being substitutes for each other

• Eg: A customer may substitute a pair of trousers for jeans.

Merchandise plan considerationsMerchandise plan considerations

1. Marketing considerations

2. Merchandise strategy options

3. Types of customer base

Store and image, trading format, environment, retail proposition, fashion trends, consumer base, potential buyers.

Availability based upon assortment profile and issues of choice (width and depth), quality, exclusivity, seasonality of range, estimated cost, promotional agreements.

Items and range purchased, length of season, average transaction values for different lines, frequency of visits and purchases.

Merchandise plan considerationsMerchandise plan considerations

4. Financial considerations

5. Merchandise assortment search

Profitability and sales performance projections, stock investment and stock return, type of contract and payment terms, corporate objectives and pricing

Ensure merchandise meets criteria of: required range, comparison, cost price range offer, brand policy, availability, delivery, stockholding needs, financial returns.

The phases in developing a merchandise plan:The phases in developing a merchandise plan:

1. In all ‘Marketing led approaches’, the consumer will dictate the strategy options.

1 & 2.The consumer will have expectations of an assortment profile with issues of choice (width and depth), sizes, quality, exclusivity, availability and cost .

3. These expectations are translated into a particular structure for the buying organisation.

• If exclusivity is required, then there is a requirement for selective sourcing

• If quality is required, then extensive quality control is necessary as a part of the buying procedure.

4. Financial: consideration in having to meet company profits and market requirements before

5. the merchandise stock is acquired.

Important merchandise decisions related to this plan:Important merchandise decisions related to this plan:

• Availability: Ensuring the level of stock required meets the demand from the consumer.

• Higher the level of stockholding - higher the level of costs

• Deriving availability is based upon knowing what orders will be satisfied over a specified time span.

• This is a percentage. • Eg: 90% of the orders will be satisfied.

• The reorder/ replenishment cycles must be managed.

Inventory turnover ConceptInventory turnover Concept

• Availability performance is linked to inventory turnover.

• This concept helps in working out-

• how long inventory is on hand prior to it being sold.

• Goods with a high turnover need to be planned differently from goods with a low turnover.

• The different ways retailers use to measure this:

Net Sales .

Average inventory at retail store

Cost of merchandise sold

Average inventory at cost

Units Sold .

Average units in inventory

Methods of Planning and Calculating Inventory LevelsMethods of Planning and Calculating Inventory Levels

1. Basic Stock method of planning inventory (BSM):

• There should be a particular level of inventory available at all times.

• Inventory should meet the basic sales expectations and also allow for margin for error.

• Ensures stock levels are not depleted and customers not dissatisfied.

• Important if sales are higher than expected or there is a problem with the shipment and delivery of stocks.

• Does not take into consideration stockholding costs.


1. Basic Stock method of planning inventory (BSM):

• Beginning of month stock (BOM)= Planned Monthly Sales + Basic Stock where

(a) Average stock for season= Total planned sales for season Estimated Inventory Turnover

(b) Average monthly sales = Total planned sales for season Number of Months

and Basic Stock = (a)- (b)

• Note: Calculations are for a season.


2. Percentage Variation Method (PVM):

• Recommended when stock is quite stable.

• PVM is a better choice when the annual turnover rate is greater than 6 as the results will fluctuate less.

• Below 6, the BSM method of calculation would be preferred.

Beginning of month = Planned average monthly X 1 1+ Estimated monthly sales . planned inventory level stock for season 2 Estimated average monthly sales


3. Week’s Supply Method (WSM):

• Forecasts average sales on a weekly rather than monthly basis.

• This formula assumes the inventory carried is in direct proportion to sales.

• Utilized by retailers which need to plan on a weekly basis. Eg: Supermarkets where sales do not fluctuate by significant

amounts.

• BOM Stock= Average weekly sales X Number of weeks to be stocked

where

Average Weekly Sales= Estimated total sales for the period Stock turnover rate for the period and

Number of weeks to be stocked= Number of weeks in the period Stock turnover rate for period


4. Stock- to- Sales- Method:

• Beneficial if the retailer wants to maintain a specified ratio of goods on hand to sales.

• Retailer has to use a beginning of the month stock-to-sales ratio.

• This ratio informs the retailer as to the amount of inventory required to sustain that month’s estimated sales.

• Can be calculated from a retailer’s own historical results or from external reliable sources.


• Methods of estimating inventory requirements need to be understood in conjunction with :

• Level of shrinkage

• Markdowns

• Employee discounts

• The above factors affect the financial and availability aspects of the business.

1. Shrinkage:

Difference between the amount of merchandise reported on the inventory stock system and

what is available for sale or on the shelves.


• Difference in value could be due to:

• Shoplifting

• Employee theft

• Vendor overbilling

• Distributor theft

• Paper work errors

• Breakage and spoilage

• Effect of Shrinkage- Total Retail value of merchandise is reduced.


2. Markdowns:

• Lowering of prices of the merchandise so that the reduction acts as a promotion-

• For special sales periods• For moving sluggish lines• Because of damage or soiling • Due to ‘end of range’ offers• Greater price competition from competitors or manufacturers.

3. Employee Discounts:

• Planned reductions

• Offer value to the employees working at the store.

• All such discounts should be recorded and made accountable.

Merchandiser Skills and ProfileMerchandiser Skills and Profile

• Planning and controlling stock ranges and replenishment.

• Successful execution requires close liaison with the retail buyer.

• Holistic view of the supply chain and

• Regular interaction with management accounting and distribution and those operating at store level.

• Effective communicator with interpersonal skills.

• Advanced numerical capability, PC literacy in the use of spread sheets and databases.

• Administrative competence.

• Driven by the budgeting process

• Budgeting :• quantifies in financial terms the objectives of the retailer for a

specific period of time.

• used to monitor the performance of the business.

• buy merchandise that can be set at an acceptable market price and provide a planned gross margin.

• Two parts of this process:• The retail value of sales and • cost value based upon the purchase cost of the merchandise.

• Merchandiser must :• analyze market research information and sales trends• produce forecasts• incorporate into the master budget.


• The merchandise budget becomes a tool for:

• Financial planning and control for the investment the retailer has made in the inventory acquired.

• The master merchandise budget will be required to offer:

• A gross sales projection

• Stock level requirements

• Expected profit margins.


Developing the first stage of the merchandise planDeveloping the first stage of the merchandise plan

• It requires:

• Understanding the target groups

• Agreeing on regional and branch sales forecasts

• Collecting information on competitors and any new branch plans

• Taking into consideration branding and corporate policy

• Agreeing on merchandise budget

• Liaison and initial discussion with buyer(s).

Developing the Range Planning and merchandise Developing the Range Planning and merchandise allocation planallocation plan

It requires:

1. Understanding selection process of customers

2. Deciding upon core and seasonal merchandise

3. Agreeing upon the range- eg: style, size and color mix- depth and width

4. Taking into consideration the sales to stock level targets and calculating the optimum level of stock by utilising one of the ‘stock inventory planning methods’.

5. Relating the range plan to individual stores and promotional plans

6. Briefing the buyer(s) on agreed source.

Developing the control mechanisms of the Developing the control mechanisms of the merchandise planmerchandise plan

It requires:

1. Understanding comparative frequency of store visits, based upon the browsing of, or items purchased by the target groups;

2. Forecasting sales and profitability;

3. Monitoring stock levels and availability of new stocks and replenishment levels;

4. Assessing value of merchandise through shrinkage; markdowns; employee reductions;

5. Liaising with the buyer(s) to discuss performance figures;

6. Expanding or reducing merchandise categories, based upon sales performance.

Planning Sourcing and BuyingPlanning Sourcing and Buying

• Product development and sourcing: Regional customer preferences must be identified

• products developed/ sourced.

• Supplier management: Complex

• Buying: Negotiating prices based on profit- made more difficult by currency fluctuations, extended transportation channels.

• Merchandising: Retailers must create the right mix of product to appeal to local needs,

• rapid response when the mix must be changed or replenished.

• Distribution: Channels to move product from source to customer. Accommodate market-specific packaging and environmental needs.

• Retail operations: Tailor product presentation and service offerings to each specific market.

Planning Sourcing and BuyingPlanning Sourcing and Buying

• Walmart- U.S. Retailer:Walmart- U.S. Retailer:

• Moved its price/ value competitive advantage overseas.

• This price advantage is obtained through:

• an efficient supply chain process• seamlessly integrated with major suppliers.

• GAP- U.S. Retailer:GAP- U.S. Retailer:

• Maintains strict control over its supply chain, with its employees overseeing every step.

• Even in contract plants, GAP exercises control, ensuring consistent quality at the best price, with service that compliments the brand image.

Merchandise category life cycle analysisMerchandise category life cycle analysis

• ‘Fad’ Product:

• Will generate a high level of sales.

• But demand lasts only for a short time and may not even be for a whole season.

• Can be sold at substantial ‘mark-ups’.

• Difficult to predict, Demand will always outstrip supply.

• Hence demand places a lot of pressure on distribution chains.

• Recognise the signs of its importance as early as possible.


• ‘Fashion Product’:

• Demand cycle lasts for several seasons, although• sales may vary from season to season.

• Demand depends on type of customers and product categories.

• Eg: Men’s suits will have a different demand curve to that of teenage clothing


• ‘Staple Merchandise’

• Provides continuous demand over an extended lifespan.• Eg: Most food products and household cleaning items

• Easiest to manage because:• it offers a reliably repeatable sales history on which to base

predictions of planned stock.

• ‘Seasonal merchandise’

• Characterised by fluctuations in demand according to ‘time of the year’.

• Eg: Fashion and Staple merchandise categories.

Variations in demand over timeVariations in demand over time

• Variations on category lifestyle is an important aspect in deciding upon the merchandise plan:

• Merchandise category life-cycle analysis:

Fad Fashion Staple Seasonal

Sales over several No Yes Yes Yes

Seasons

Sales of a specific style No No Yes Yes

over many seasons

Sales difficult to forecast Yes Yes No Sometimes

one season to the next

Demand curve over time

Range PlanningRange Planning

• Retailer’s stock range is described in terms of ‘width’ and ‘depth’, • the extent of this is determined by company policy.• This is called ‘assortment’.

• Width-• the number of categories found in the merchandise line • different generic classes of product or merchandise carried.

• Depth-• Sizes, styles, colors and prices within a particular generic class of product.• Eg: Specialist shops such as ‘niche boutiques’ which offer a lot of depth but

with a narrow product range.

• Variety of merchandise mix:• Number of different lines a retailer stocks in the store.• Eg: A department store like ‘Shoppers Stop’ having many more lines than a

store like ‘Hush puppies’ stocking quality footwear.


• Extent of Range- Key part of customer’s perception of added value.

• Hard Discounter- Offer is competitively priced• Key concern of the target customer.

• Considerations for Range Planning:

1. Space constraints imposed upon the merchandise manager.

2. If width and depth are important, then this requires both stock space and display space to separate merchandise.

3. To ensure providing more depth does not affect turnover- i.e.

• stocking more variations for smaller retail segments.

• Turnover could deteriorate and stock levels would be difficult to control.


• Decisions on Range must be followed up by the determination of source.

• Considerations in agreeing upon the source:

1. Previous sales performance.

2. Acceptability of the design or brand name.

3. Manufacturing and product quality.

4. Reliability of delivery and service.

5. Assurance of ability to provide further stock if required.

6. Cost of items


• With some High Fashion Lines:

• Buyer wants to know the supplier.

• Their contract with supplier may also deny their competitors purchasing a similar range.

• Range Planning- needs to be ‘customer driven’.

• Understand which product attributes are the most important to the customer• Plan accordingly.

• Main factors which need attention in planning width and depth of the assortment:

• Estimated Sales

• Estimated Profit


• Merchandise lines will be more successful- if given Promotional support.

• Advertising allowances

• Co-operative advertising

• Free display materials

• In-store demonstration on videos

• Customer sales inducements- special offers, coupon redemptions, free samples and contests.

• Advertising by the manufacturer to support brand.• Eg: Madura Coats for ‘NEXT’, ‘GAP’, ‘ESPRIT’, etc..

Store GradingStore Grading

• Related to gross sales forecast

• Gross sales projection for the company- needs disaggregating across the portfolio of stores.

• Each store will have its own budgeted gross sales figure.

• The merchandising plan for the store must meet the projected target.

• Rather than producing a unique plan for each store, common practice is to ‘grade the stores’.

• Shelf or display space- Key yet limited selling medium• Grading is conducted on the basis of floor sales area.

• Drawback:• Crude device, as depending on location, there will be smaller

stores capable of achieving much higher sales than larger units.

Store GradingStore Grading

• Solution:

• Need for effective liaison between stores and the central buying function.

• Liaison-

• an important part of merchandiser’s job.

• all relevant local characteristics to accommodated in the merchandise planning ,

• while also realizing benefits that accrue from store grading.

Negotiating the purchaseNegotiating the purchase

• Centralised buying: • co-ordination to achieve purchase discounts, based on buying

specialist inputs.

• Limitations:

• Lacks flexibility of responding to local market needs

• May lack good communication between buyers and store units.

• Decentralised Buying:• Takes place at local level based on geographic market needs.

• Limitations:

• It can lead to inconsistency of the store offer and

• a loss of economies of scale for purchasing.


• Structure of the buying function:

1. Specialist buyers in one or a few merchandise lines.

• Can identify the best suppliers.

2. Generalist buyers who can buy across a number of lines requiring less specialist knowledge.

• Necessary starting points for any discussion:

• Control of:

• Quality

• Cost

• Delivery


• Purchase Order: • A negotiated contract specifying all aspects of the purchase.

• Re-order: • A uniform contract with the standard pre-agreed conditions,

forming the basis of agreement.

• But the purchase terms should be stipulated. • Order quantities could vary.

• Should involve clear documentation of the following aspects:

• Delivery date• Quantity to be purchased• Method of delivery or storage• Who should bear the related charges• Price and payment terms including any discounts for order quantity

or returns• Advertising or merchandising support from the supplier.

Thank you !

retail marketing and merchandising

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